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Three men likely chatting in French before the meeting of the Ecofin council of EU finance ministers, Brussels, July 12, 2011: Jean-Claude Juncker, Luxembourg prime minister and president of the Eurogroup (centre), Michel Barnier, European commissioner for the internal market and financial services (left), and Jean-Claude Trichet, European Central Bank president (right).
Irish sovereign debt was cut to junk status on
Tuesday night by Moody's Investor Services, which cited the probability that
Ireland will need additional official financing and for investors to share in
losses before it can return to the private market. Meanwhile, market pressure
remains on Italy while EU leaders discuss if an emergency summit should be held
on this Friday.
Ireland has joined Portugal and Greece as the
third Eurozone country to have its credit rating reduced to below investment
grade - - for the first time- - and the move means further pressure on the
banking system as big companies and investment funds are prevented from placing
deposits in institutions with a junk rating.
Some of the funds in Irish banks are protected by
a sovereign guarantee.
The Department of Finance said on Tuesday night
that the rating cut was a "disappointing development" and added that it
was "completely at odds" with the recent views of other rating agencies.
Ireland still has investment-grade ratings with agencies, Standard Poor’s and
The yield on 10-year Irish sovereign bonds rose
15 basis points to 13.35% on Tuesday, having earlier risen to a new high of
Italy’s 10-year yield closed Tuesday down 12
basis points (bp) at 5.56%, having earlier hit a euro-era high of 6.09% while
Spain’s dropped 18bp to 5.85%. The German Bund yield rose 4bp to 2.71%.
benchmark 10-year bond yields hit a euro-era high of 6.09 per cent
"We have to eliminate any doubts over
the efficacy and credibility of our budget,” Silvio
Berlusconi, Italian prime minister, said on Tuesday as he argued for a €40bn
austerity package which is claimed would eliminate Italy’s budget deficit by
The Financial Times reports that Opposition party
leaders in Rome pledged their co-operation in parliament to pass the
government’s three-year austerity programme by Friday in time for a possible
emergency summit of EU leaders in Brussels that day.
The Wall Street Journal reports that Eurozone
leaders are considering holding a special summit Friday to discuss the debt
crisis in the single currency area, a senior European Union diplomat said.
"[The possibility of a meeting being held] is not excluded," the diplomat
A Spanish government spokesman also said the idea of having a euro-zone leaders'
summit is being studied but has not been fixed yet.
"Such a meeting is now under study, but no final decision has been made yet,"
the spokesman said.
Greek Default Not Necessary: OECD's Gurria: As European finance ministers met in Brussels for the Ecofin meeting, Silvia Wadhwa caught up with the President of the OECD, Angel Gurria, who is convinced private sector creditors need to play a role in Greece's rescue:
Dutch Finance Chief on the European Debt Crisis: CNBC spoke to Dutch Finance Minister Jan Kees de Jager and asked him about fears that contagion from Greece will hurt other peripheral economies:
Moody’s downgrades Ireland to Ba1; outlook remains negative
Frankfurt am Main, July 12, 2011 — Moody’s Investors Service has today
downgraded Ireland’s foreign- and local-currency government bond ratings by one
notch to Ba1 from Baa3. The outlook on the ratings remains negative.
The key driver for today’s rating action is
the growing possibility that following the end of the current EU/IMF support
programme at year-end 2013 Ireland is likely to need further rounds of official
financing before it can return to the private market, and the
increasing possibility that private sector creditor participation will be
required as a precondition for such additional support, in line with recent EU
As stated in Moody’s recent comment, entitled “Calls for Banks to Share Greek
Burden Are Credit Negative for Sovereigns Unable to Access Market Funding”
(published on 11 July as part of Moody’s Weekly Credit Outlook), the prospect of
any form of private sector participation in debt relief is negative for holders
of distressed sovereign debt. This is a key factor in Moody’s ongoing assessment
of debt-burdened euro area sovereigns.
Although Moody’s acknowledges that Ireland has shown a strong commitment to
fiscal consolidation and has, to date, delivered on its programme objectives,
the rating agency nevertheless notes that implementation risks remain
significant, particularly in light of the continued weakness in the Irish
The negative outlook on the ratings of the
government of Ireland reflects these significant implementation risks to the
country’s deficit reduction plan as well as the shift in tone among EU
governments towards the conditions under which support to distressed euro area
sovereigns will be made available.
Despite the increased likelihood of private sector participation, Moody’s
believes that the euro area will continue to utilise its considerable economic
and financial strength in its efforts to restore financial stability and provide
financial support to the Irish government. The strength and financial capacity
of the euro area is underpinned by the Aaa strength of many of its members
including France and Germany, and indicated by Moody’s Aaa credit ratings on the
European Union, the European Central Bank and the European Financial Stability
Moody’s has today also downgraded Ireland’s short-term issuer rating by one
notch to Non-Prime (commensurate with a Ba1 debt rating) from Prime-3.
In a related rating action, Moody’s has
today downgraded by one notch to Ba1 from Baa3 the long-term rating and to
Non-Prime from Prime-3 the short-term rating of Ireland’s National Asset
Management Agency (NAMA), whose debt is fully and unconditionally
guaranteed by the government of Ireland. The outlook on NAMA’s rating remains
negative, in line with that
of the government’s bond ratings.
RATIONALE FOR DOWNGRADE
The main driver of today’s downgrade is the growing likelihood that
participation of existing investors may be required as a pre-condition for any
future rounds of official financing, should Ireland be unable to borrow at
sustainable rates in the capital markets after the end of the current EU/IMF
support programme at year-end 2013. Private sector creditor participation could
be in the form of a debt re-profiling — i.e., the rolling-over or swapping of a
portion of debt for longer-maturity bonds with coupons below current market
rates – in proportion to the size of the creditors’ holdings of debt that are
Moody’s assumption surrounding increased private sector creditor
participation is driven by EU policymakers’ increasingly clear preference — as
expressed during the negotiations over the refinancing of Greek debt — for
requiring some level of private sector participation given that private
investors continue to hold the majority of outstanding debt. A call for private
sector participation in the current round of financing for Greece signals that
such pressure is likely to be felt during all future rounds of official
financing for other distressed sovereigns, including Ba2-rated Portugal (as
Moody’s recently stated) as well as Ireland.
Although Ireland’s Ba1 rating indicates a
much lower risk of restructuring than Greece’s Caa1 rating, the increased
possibility of private sector participation has the effect of further
discouraging future private sector lending and increases the likelihood that
Ireland will be unable to regain market access on sustainable terms in the near
future. This in turn implies that some Irish government bond investors would
need to absorb losses. The increased risk of a disorderly and outright payment
default or of a disorderly debt restructuring by Greece also increases the risk
that Ireland will be unable to regain access to private sector credit.
The downward pressure that this creates is mitigated in Ireland’s case by the
strong commitment of the Irish government to fiscal consolidation and structural
reforms, and by its success, so far, in achieving the fiscal adjustment required
by the EU/IMF programme. To date, Ireland has
met all of its objectives under that programme. In the first half of
2011, the primary balance target was exceeded, with tax revenues on track and
lower-than-anticipated government expenditures.
However, Moody’s cautions that implementation risks related to the overall
deficit reduction aims of the three-year programme are still significant,
particularly in light of the continuing weakness of domestic demand.
Apart from Ireland’s adherence to fiscal consolidation, Moody’s also
acknowledges the Irish economy’s continued competitiveness and business-friendly
tax environment. The considerable wage adjustment that occurred in the course of
the crisis reflects the Irish labour market’s flexibility.
Taking Ireland’s economic adjustment capacity
into account, Moody’s expects that, after a period of prolonged retrenchment,
Ireland’s long-term potential growth prospects remain higher than those of many
other advanced nations. While the government’s debt-to-GDP burden
is expected to be high compared to similarly rated sovereign credits, Ireland
has managed elevated levels of indebtedness in the past, and has shown political
cohesion while enacting difficult structural adjustments.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody’s would consider a further rating
downgrade if the Irish government is unable to meet the targeted fiscal
consolidation goals. A further deterioration in the country’s economic outlook
would also exert downward pressure on the rating, as would further market
disruption resulting from a disorderly Greek default.
Moody’s also notes that upward pressure on the rating could develop if the
government’s continued success in achieving its fiscal consolidation targets,
supported by a resumption of sustained economic growth, is able to reverse the
current debt dynamics, thereby sustainably improving the Irish government’s
PREVIOUS RATING ACTION AND METHODOLOGIES
Moody’s last rating action affecting Ireland was implemented on 15 April
2011, when the rating agency downgraded Ireland’s government bond ratings by two
notches to Baa3 from Baa1, and maintained the negative outlook.
Moody’s last rating action affecting NAMA was implemented on 15 April 2011,
when the rating agency downgraded by two notches to Baa3 from Baa1 the senior
unsecured debt issued by NAMA, which is backed by a full guarantee from the
Irish government. The negative outlook was maintained.